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Phase 1 Signed, MFP 2.3 Payments and USMCA Update

Update for January 16th, 2020

The USDA report last week did nothing to assist corn and soybean prices but few analysts were expecting to see any significant price action following the report. The WASDE report will be announced on February 11th and could be an important one to watch. Until the Phase 1 trade agreement with China was officially announced USDA analysts could not assume any purchases under the new agreement. Now that the deal has been officially signed, analysts can now work to forecast potential Chinese imports.

Within the agreement is a confidential annex which contains the specific information detailing purchase commitments. This portion of the agreement was not be released with the rest of the text of the agreement which of course has raised many concerns and questions. An article in The South China Morning Post quoted 3 individuals that each confirmed China has committed to purchasing $200 billion of U.S. goods as part of this Phase 1 agreement. The annual targets set within this figure: 75 billion in manufactured goods, $50 billion worth of energy, $40 billion in agriculture and $35 to $40 billion in services.

Current shipping data from the Brazilian shipping company Cargoave indicates January soybean exports headed to China are on course to fall by 50% from levels a year ago. Shipping schedules through January 31st show 12 soy cargos headed to China from Brazilian ports down from 21 in 2019. Analysts believe this drop is a direct result of the successful U.S./China trade deal just as the surge of soy exports in 2018 was brought on by the trade war. Reuters quoted Gabriel Viana of the South American ag consultant firm Safras & Mercado who stated, “Now that the U.S. and China moved closer to an agreement, China’s purchases of Brazil’s soy will likely be reduced with a view to buy it from the U.S.”.

Another vitally important agreement is nearing approval. Several of the remaining U.S. Senate committees voted on USMCA on Wednesday and a full chamber vote is expected sometime today. Senate Majority Leader Mitch McConnell has said a vote will be held and is expected to pass, the House has already cleared the measure. Mexico has approved the deal while Canada’s parliament still needs to hold a vote once lawmakers return to work on January 27th. Canadian Prime Minister Justin Trudeau has said that he is “reasonably confident” there will be enough votes to approve the treaty. However there are two opposition parties that have hinted at a possible delay in ratification, suggesting Trudeau’s liberal government has failed to make revisions they believe to be important to the agreement.

Some officials within the Trump administration including USDA Secretary Sonny Perdue are waiting to approve the payout of the final installment of the MFP 2.3 until the market has had time to fully react following the signing of the Phase 1 agreement. Prices have not rebounded despite the confirmation of the trade deal and many producers need the MFP 2.3 payment to help them through some tough cash flow situations until the market recovers. Pro Farmer analyst Jim Wiesemeyer points out that policymakers may be concerned that announcement of the 3rd MFP payment relatively soon after the signing of the trade deal could suppress market reaction, thus delaying the final payment. In regards to a possible timeframe for a final decision Wiesemeyer stated, “What I’ve heard is that a series of Ag industry, lobbyists, economists, etc. have been invited by top USDA economist Robert Johansson to brief USDA Secretary Perdue. It would be a day before the Ag Outlook Forum-February 19th. If that’s the case, then we may not have a decision on this third installment for a while.”

Wiesemeyer also said, “They said that announcement for MFP 2.0’s third tranche would come sometime in January and then, they modified it by saying early February… I’m going to reserve judgement and let the marketplace and China’s purchase intentions tell me about the odds for that. I’m clearly not as confident as I was before.”

A dense Arctic air mass has moved into the Upper Midwest, the dense structure of this air mass will make it hard to dislodge so frigid temps may stick around for a while. A large winter storm system has been on the radar for many days now and has remained on course. This powerful system is expected to deliver several different types of precipitation along the way beginning on Friday.

The map shown below shows the expected ice accumulations from this storm system. Cold temps are already in place so precipitation is expected to begin as snow Friday morning and will continue through the day. During the evening a mix develops in southern areas and will work its way north. Weather models have not agreed on exactly how far north the freezing rain may reach, one model shows it briefly effecting areas as far north as Iowa Highway 20. The more likely scenario moves the northern edge of the ice further south, reaching areas along the Iowa Highway 30 corridor.

Overall snow accumulations are still difficult to predict but the model below gives everyone an idea of what to expect.

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